Two-minute YouTube clips were just the start. As television escapes the living room, dozens of companies are gunning to become the networks of tomorrow.

(Business 2.0 Magazine) -- Wayne's World, it's not. The Web TV series Diggnation draws hundreds of thousands of viewers. It has Fortune 500 corporate sponsors, and its two young stars are among the brightest in the tech firmament. Still, the production values are more in line with Wayne and Garth than they are with, say, The Daily Show ...

And with that lead-in, a packed trade-show audience of more than 700, peering up at the makeshift stage, cheers wildly for the start of the main act: Digg's 30-year-old founder Rose and his spike-haired sidekick Albrecht, slouched on a couch, sipping beers, and staring down at laptops between their knees. A lone videocamera records the action.

"Should we go right into it?" Albrecht asks.

By "it," he doesn't mean the arrival of some star guest, comedian, or musical act. What we have here is TV by and for geeks - entertainment aimed directly at gadget-loving, commercial-skipping 18- to 34-year-old males who spend more time on the Web than in front of a TV. YouTube, with its 40 million viewers per month, has already proved the mass appeal of video streamed over the Web. But two-minute clips of lip-syncing teenagers are just the start. Full-length serialized shows are popping up everywhere online, with advertisers in tow, led by shows like Diggnation.

For the next 45 minutes, Rose and Albrecht deliver what this crowd can't get enough of: goofy banter and insider riffs on gaming, new software releases, and stupid hardware tricks, culled from the most popular tech stories of the day on Digg - and punctuated from time to time with their enthusiastic plugging of oddball products and sponsors. Albrecht dives in. "So I've been talking about putting Vista on my Falcon Northwest ..."

And off they go. By the end of the taping - held at the recent Macworld show in San Francisco - dozens of tech fanboys rush the stage as the co-hosts toss out bumper stickers and T-shirts. Nearly an hour later, Rose and Albrecht are still posing for cell-phone pictures with fans.

This sort of show would seem painfully banal to millions, yet it constitutes prime-time-worthy entertainment for one of Madison Avenue's hottest target audiences. Just a year and a half out of the gate, Diggnation draws about 250,000 viewers a week and is among the most popular free video podcasts on Apple's iTunes service - alongside offerings from ABC, the BBC, and CNN (which, along with Business 2.0 and CNNMoney.com, is owned by Time Warner (Charts)).

It's also making some decent coin: The show has had 15 sponsors thus far, each paying as much as $10,000 per episode. Rose and Digg CEO Jay Adelson are so bullish on the concept that they've launched an angel-backed startup called Revision3 that produces Diggnation and a dozen other Web-only offerings.

At the same time, major media companies, TV networks, and production studios are starting to migrate shows and movies to iTunes, their own websites, and other places online. "You will see an increase in consumption," says Disney-ABC TV's executive VP for digital media, Albert Cheng, "because you are opening the pipe by which consumers can get their shows."

Call it TV 2.0, Net TV, or whatever you like: The building blocks of a new Web video industry are falling into place.

New forms of programming and distribution promise viewers an infinite menu of content, new advertising models are in the works to funnel all that new viewing behavior into streams of cash, and new search technologies are stepping up to, as Adelson says, "help you choose what you want to watch, when you want to watch it, and where you want to watch it."

The Niche Factor

The idea behind this latest foray into Web television is simple: All it takes to draw a decent-size audience these days is a videocamera, some computers, and a bit of talent. And that audience is growing rapidly. By 2009, more than half of the U.S. population will be using computers, iPods, and other gadgets to get their video fix.

Adelson's is just one approach to bringing the TV experience online. Long before Janus Friis and Niklas Zennström figured out how to stream telephone calls over the Internet - and turned Skype into a company ultimately bought by eBay (Charts) for $2.6 billion - they were toying with the idea of streaming video in a similar fashion.

But it wasn't until January, after a year of skunk-works experimentation, that the pair unveiled their latest brainchild: Joost, a free service that uses peer-to-peer technology to convert typical low-grade Web video into a full-screen viewing experience that's eerily similar to the real thing.

They conceived Joost not as an uploader's free-for-all like YouTube, but as a platform for viewers to channel-surf through a menu of licensed, copyright-protected shows. So far Joost has reeled in only about 2,000 hours of programming, most of it niche content that appeals to young males: extreme sports, Paris Hilton, shark videos, and lots of comedy.

When the service launches publicly later this spring, it'll be serving up shows like Fear FactorAustralia and Bridezillas. No more waiting for files to download either; the only download you'll make is for the Joost viewer. Says CTO Dirk-Willem van Gulik, "Think of it as an infinite TiVo, where everything is available at your fingertips."

Joost is just one of many YouTube rivals aspiring to build Web 2.0 video "networks." It's a crowded lineup (see "The Next Net 25"), but some have serious ambitions.

Take Veoh Networks, a San Diego-based startup backed by former Disney (Charts) chief Michael Eisner, which is wrapping Web video in a slightly different package. Like Joost, Veoh offers full-screen shows through its own peer-to-peer viewer, but it also hosts a YouTube-like site for aspiring amateurs. CEO Dmitry Shapiro has amassed some 10,000 hours of programming, including no-name niche series like Fearless Cooking, Triathlete TV, and Wine Library TV. Shapiro already claims 4 million viewers a month and began showing a variety of ad formats in February.

The consumer draw is obvious: "You no longer have to choose the cooking channel," Shapiro says. "You can choose the Thai cooking channel."

While the audience for such a narrow interest wouldn't get the attention of a cable network, Joost, Revision3, and Veoh will gladly go after it because it's so cheap to do so. Adelson estimates the cost of a 45-minute Diggnation show at less than $6,000 - and most of that he spends on bandwidth. "If your content is highly targeted," he says, "you don't need to hit an ant with a boulder. The ants come to you."

Rethinking video ads

Where the ants go, advertisers are expected to follow. YouTube's ad-revenue potential this year alone has been pegged at $200 million by Citigroup (Charts). And wherever there's video programming, viewers will be seeing more video ads. One forecast from research firm eMarketer calls for overall video advertising on the Web (including video ads replacing banners on regular webpages) to hit $2.9 billion in 2010, a sevenfold leap from last year's tally of $410 million.

Such rosy estimates are based in part on the newly acquired ability of marketers to consistently find needles in the haystacks, applying pinpoint consumer targeting to ever more diffuse piles of content.

"We want to run the right ad against the right person," says David Clark, who joined Joost as sales chief after heading up international ad sales at MTV. Joost viewers can already see ads from Maybelline, T-Mobile, and Wrigley (Charts). But they're less obtrusive than standard commercials. Instead of 16 minutes of advertising per hour of programming - the norm for network TV - Joost plans to keep the hourly ad tally to less than three minutes.

Ads on Joost will come in a variety of packages: They can appear as five-second preshow banners called "blipverts," as 10- to 30-second video "midrolls" that appear during a break in the show, and as opt-in icons that, when clicked, pull down a small marketing website inside the viewer's window.

Clark is also experimenting with features he calls "ad bugs," clickable brand icons that appear in the corner of the screen for a few seconds at opportune moments, and with drop-down windows containing ad links for products that appear in a particular episode.

Only one advertiser will be featured in each show, a strategy that ABC's Cheng says has already proven to boost viewer recall to an astounding 87 percent on ABC.com. Joost plans to split ad revenue with content providers. Whoever sells the ad - either Joost or the provider - gets the lion's share. (Update: On Feb. 20, after this story went to press, Viacom announced it would use the Joost service to distribute online programming from MTV, Comedy Central and company-owned channels. Read the story here.)

Some of these ideas came and went in early experiments with interactive television. And for the moment, networks like ABC and NBC (a General Electric (Charts) unit) aren't hopping on the Joost bandwagon. But on-demand niche programming and new ad-targeting algorithms, Clark says, could make Joost a haven for media buyers, who can slice and dice viewers' data streams and target accordingly.

The same collaborative filtering software that Joost uses to recommend shows to viewers will also be used to figure out which ads to show them. "In a best-case scenario," Clark says, "I can use this to reinvent the advertising industry."

But the most powerful means of targeting may be the content itself. The dozen shows produced by Revision3 - including a program featuring gadget reviews (InDigital), a Bob Ross-style digital art tutorial (PixelPerfect), and a cooking show (Ctrl-Alt-Chicken) have an aggregate monthly audience of 1.5 million. Since Revision3 is appealing to niche audiences interested in geek culture, its advertisers can target their messages to smaller, more relevant groups of buyers.

That's one reason Adelson is going back to the days of Ed Sullivan - selling sponsorships and having show hosts work products into the act. "Sponsorship works," Adelson says. "Our advertisers come back and pay us more for the ads."

In the past year, he says, Revision3 has been able to increase its ad rates by 300 percent. Diggnation's sponsors have already included domain registrar Go Daddy, Microsoft's Zune MP3 player, and the Sony PlayStation Portable.

It's not just about branding, either: The concept clicks with sponsors because it moves product. On one Diggnation episode, Rose drank a cup of Adagio tea instead of his usual bottle of beer to salve a nagging cold. Afterward, Revision3's COO, David Prager, put in a call to the New Jersey-based high-end tea maker to discuss a quid pro quo arrangement.

The terms: Adagio would put together a special $20 Diggnation "sampler set" (a teapot, four teas, and a tea guide) to plug during the next show; Revision3 would get a 20 percent cut of any resulting sales. Rose chose his favorites and mentioned a special URL where viewers could purchase the tea online. A month after the show posted to iTunes, Adagio had rung up $100,000 in Diggnation-linked sales - a 25 percent boost to its average monthly tally.

"You think of Web 2.0 ideas being on the fringe," says Adagio co-founder Michael Cramer. "But this just blew us away."

YouTube, meanwhile, has its own advertising ambitions. It already allows marketers from brands like Wendy's (Charts) and Dove to upload videos to YouTube just like anybody else. "Advertising in the past has not been optional," says YouTube CEO Chad Hurley. "If people enjoy the ads, they should rise to the top like any other piece of content." Soon, YouTube will also begin adding conventional ads to some of its videos, splitting the revenue with users who provide the content.

The new TV Guides

Net TV's potentially unlimited number of viewing options is both a blessing and a curse. It's hard enough to wade through today's 300-plus cable channels. How will viewers ever find what they're looking for among thousands of new channels and shows scattered across the Web?

Garrett Camp thinks he has the answer. The 28-year-old founder of Web bookmarking site Stumble-Upon (see "The Next Net 25"), Camp has already proven how the wisdom of the crowds can help separate the Web's wheat from its chaff. StumbleUpon recommends new websites to users based on the categories they say they're interested in, their own ratings of similar sites, and the aggregate ratings of other users.

Since one of StumbleUpon's hottest categories is video, Camp recently decided to launch a site called StumbleVideo, which shows clips culled from YouTube, Google Video, and MySpace.

StumbleVideo learns about your tastes from the feedback you give it: As you watch each video, you rate it with a thumbs-up or thumbs-down. The process is strangely addictive, in part because it mimics the experience of channel-surfing better than anything else on the Web. And just as Camp shows an advertiser's site to StumbleUpon users as often as every 20 "stumbles" - and now reels in an estimated $60,000 or more per month from such sponsors - he plans to do the same with Stumble-Video.

"It would be just like television," he explains, "except with ads that are both better targeted and nonintrusive. You won't be interrupted like you are with TV." The ads may be subject to voting as well, so the most interesting ones would be shown and the most annoying buried.

Across San Francisco Bay in Berkeley, Mary Hodder is building something more akin to the traditional TV Guide at her 10-person startup, Dabble. Hodder, who helped build the popular blog search engine Technorati, sees Dabble as part video search tool and part recommendation engine.

Launched with $750,000 in funding, Dabble has indexed more than 8 million videos across the Web, and its search algorithm gives preference to videos that have been endorsed by humans - those that have been blogged, e-mailed, tagged, linked to, searched, or collected. "What is the metric for engagement?" Hodder asks. "That's what we want to invent."

Until that day comes, engagement will have to be measured more subjectively. At Digg's low-rent offices in San Francisco, Rose and Albrecht are taping another show - this time in the company's conference room just an hour before a board meeting. It's 10:51 a.m., and Rose is drinking a Great Lakes beer, brought to him by a 21-year-old blogger from Cleveland who won a contest to hang out with him for the day.

After the wrap, the co-hosts shoot an intro spot for a potential new sponsor, Heineken. They pretend a large jar of pretzels is a Heineken party keg. An image of the keg will be patched into the video later on, during postproduction. The real keg features a CO² cartridge that lets consumers put it back in the fridge half-full, something Diggnation's target audience would no doubt appreciate. Rose begins: "New technology from Heineken!"

Laugh if you want. But the advertisers seem to be taking this stuff pretty seriously. Go Daddy, Diggnation's top sponsor, has been so taken with the Rose-Albrecht act that it cast the two in its $2.6 million TV commercial for this year's Super Bowl. It may be old TV, but it's still free advertising, and the Diggnation boys will take all the attention they can get.